Debt service coverage ratio

The debt service coverage ratio (DSCR), also known as the debt coverage ratio (DCR), is a financial ratio that measures an entity's ability to generate sufficient cash to cover its debt obligations, including interest, principal, and lease payments. It is calculated by dividing the net operating income (NOI) by the total debt service. A higher DSCR indicates stronger cash flow relative to debt commitments, while a ratio below 1 suggests insufficient funds to meet payments. Lenders, such as banks, often set a minimum DSCR in loan covenants, where falling below this threshold may constitute a default.

In corporate finance, the DSCR reflects cash flow available for annual debt payments, including sinking fund contributions. In personal finance, it aids loan officers in evaluating an individual’s debt repayment capacity. In commercial real estate, it determines whether a property’s cash flow can sustain its debt, with typical minimums around 1.25.

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